20050818Quarterly debt report.pdf

CTEIVED r ~
825 E. Multnomah
Portland, Oregon 97232
[phone]
1+ PACIFICORP 'ri~; 1\~ Ai'l 9: 00"vur.-.-
PACIFIC POWER UTAH POWER
I,; Ie ;! i" U ~; Lie
UT\U'!-IES COi-1rlISSION
August 17, 2005
Idaho Public Utilities Commission
472 West Washington
Boise, ill 83702-5983
Attn: Ms. Jean D. Jewell
Commission Secretary
Re:Quarterly Debt Report
Pursuant to Case No. P AC-05-, PacifiCorp (the Company) hereby files an original and eight
copies of its debt report for the period ended June 30, 2005 as well as recent write-ups from
major bond rating agencies.
Long-Term Debt Activity:
Amount outstanding at March 31 , 2005 879 158 000
Issuances
250% FMBs due June 2035 300 000 000
Maturities
750% FMBs due Apr 2005 (150 000 000)
Amount outstanding at June 30, 2005 $4.029.158.000
----------------------------------------------------------------------------------------------------------------------
Long-Term Debt Authorization:
Amount authorized May 17, 2005 by Order No. 29787 000 000 000
Issuances
June 13 2005 issuance of 5.250% FMBs due June 2035 (300 000 000)
Remaining authorization at June 30, 2005 $700.000.000
If you have any questions regarding this summary, please call me at [phone].
Sincerely,
,)11aI:I iJ
Matt Fechner
Treasury Analyst
Enclosures
l25-May-20U5 J Research Update: MidA ,rican Ratings Put On Watch Pos, PacifiC Rtgs On Watch ...
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Table of Contents
. Rationale
. Ratings List
. Current Ratings
. Add to My Research
. Glossary of Terms
Welcome Richard Cortright (If you are not Rldlard Cortright click here).Research: Print ready.t!
Research Update: MidAmerican Ratings Put On Watch Pos,
PacifiCorp Rtgs On Watch Neg Re Acquisition
Announcement
Publication date:
Primary Credit Analyst(s):
25-May-2005
Scott Taylor, New York (1) 212-438-2057;
scott- taylor~sta nda rda nd POD rs. com
Anne Selting, San Francisco (1) 415-371-5009;
anne - selti ng~standarda ndpoors.com
Credit Rating: BBB-IWatch Pos/-
. Rationale
On May 25, 2005, Standard & Poor s Ratings Services placed its '/A-
corporate credit rating on PacifiCorp on CreditWatch with negative~plications and its ' BBB-' corporate ~redi t rating on MidAmerican Energy
Holdings Co. (MEHC) on CreditWatch with positive implications.
The rating actions follow the announcement by Scottish Power PLC(A-/Stable/A-2) that it has agreed to sell PacifiCorp to MERC for $9.
billion, including $5.1 billion in cash, and the assumption of $4.
billion in net debt and preferred stock.
In addition, Standard & Poor s placed its '' rating on Northern
Natural Gas Co. on creditWatch with positive implications, reflecting the
fact that Northern Natural' s rating is capped at a level three notches
above the rating on MEHC, and that it can support an 'A' rating on a
stand-alone basis.
The CreditWatch listing reflects the fact that the current '
corporate credit rating on PacifiCorp is based on scottishpower ' s
consolidated credit profile , whose solid financial performance has
compensated for the U. S. utility s weaker stand-alone metrics. The
positive CreditWatch listing for MEHC reflects Standard & Poor'
expectation that the acquisition will be financed primarily with the
infusion of equity from MEHC' s ultimate parent, Berkshire Hathaway Inc.
(AAA/Stable/A-l+), a practice consistent with past acquisitions.
If the transaction proceeds, Standard & Poor's will assess the
financing structure of the acquisition, MERC' s resulting consolidated
creditworthiness, the benefit of any ring-fencing mechanisms that MERC
structures around PacifiCorp, and the utility's stand-alone credit
metrics. Standard & Poor will also consider MERC' s history of strong
operations and regulatory management at its only U. s. -based regulated
utility, MidAmerican Energy Co. (A-/Stable/A-l) , as well as any necessary
support for PacifiCorp ' s sizable capital expenditures over the near term.
The acquisition will require regulatory approval from each of the six
states that PacifiCorp operates, which will take at least a year. As
details of the merger become clear, Standard & Poor s will update the
CreditWatch listings as appropriate.
l1'backtotol
~ Ratings List
From
Ratings Placed On CreditWatch Negative
file://C: \Documents%20ando/020Settings\p92416\Local%20Settings\ T emporary%20Internet%20Fi1es\OL..,5/25/2005
L:l~-MaY-:WU'J Kesearch Upctate: MldAi-Jcan Ratmgs Put Un Watch Pos, PacifiC\
PacifiCorp
Corp credit rating
Senior secured debt
Senior unsecured debt
Subordinated debt
Preferred stock
Commercial paper
A-/Watch Neg/A-2
A-/Watch Neg
BBB+/Watch Neg
BBB+/Watch Neg
BBB/watch Neg
2/Watch Neg
Ratings Placed On CreditWatch Positive
MidAmerican Energy Holdings Co.
Corporate credit rating BBB-/Watch pos/--Senior unsecured BBB-/Watch PosPreferred stock BB/Watch Pos
Northern Natural Gas Co.
Corporate credit rating A-/Watch Pos/--
Senior unsecured debt A-/Watch Pos
Rtgs On Watch ...Page 2 of 2
A- /Stable/A-2
BBB+
BBB+
BBB
BBB- /posi ti veJ--
BBB-
A-/Positive/--
Complete ratings information is available to subscribers of
RatingsDirect, Standard & Poor s web-based credit analysis system, at
www.ratingsdirect.com. All ratings affected by this rating action can be
found on Standard & Poor s public Web site at www.standardandpoors.com;
under credit Ratings in the left navigation bar, select Find a Rating,
then Credit Ratings Search.
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~OOD;y'6 AFFIRMS THE RAtINGS OF PACIFICORP (Baal SR. UNSECURED); REVISES RATI...
, .
Page 1 of2
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Global Credit Research
Rating Action
26 MAY 2005
Rating Action: pacifiCorp
MOODY'S AFARMS THE RATINGS OF PACIFICORP (Baa1 SR. UNSECURED): REVISES
RATING OUTLOOK
TO DEVELOPING FROM STABLE
Approximately $4.5 Billion of Debt Securities Affected
New Yark, May 26, 2005 - Moody's Investors Service affirmed the debt ratings of PacifiCorp (Baa 1 senior
unsecured debt) and changed the rating outlook to developing from
stable. This action follows the
announcement that MidAmerican Energy Holding Company (MEHC: 8aa3 senior unsecured debt) plans to~uire PacifiCorp from Scottish Power pic (SP: Baa1 senior unsecured debt) for $9.
4 biMion, including $5.
billion in cash and the assumption of about $4.3 billion of net debt of PacifiCorp.
The rating affirmation conside\1l the expected continuation of equity support frOm Its current indirect parent,
SP I prior to the completion of the acquisition, as the utility finances a large capital expenditure program over
the next several years. The rating affirmation fUrther incorporates the belief that MEHC
WIll manage
PacifiCorps business, including Its future capital structure, in a way that is supportive to credt quality,
induding the contribution of ongoing equity to support the utility'
s capital expenditure pogram, and that
PacifiCorp will continue to receive reasonable regulatory treatment throughout
i1s six-6tate jurisdiction for the
recovery of supply and delivery-related capital investment and operating costs.
8Jhi1e Moody's views the acquisition by MEHC to have long-term positive benefits, particularly given the size
of the - company's capital e)(pencfJture program, the developing rating outlook
incorporates the near-term
potential for new regulatory challenges for PacifiCorp as the merger-related approval process in each of thesix states could affect the timing and the outcome of a number of important rate cases that are underway
throughout the company's six state juriSdiction. Most of the current rate cases have the potential for
PaclfiCorp to obtain some form of rate increase, which collectively will enhance the company'$ returns and
cash flow as the utility increases its capital investment. To the extent that the merger approval process, which
is expected to take 12 to 15 months, substantially affects the timeliness or the amount of rate recovery
currently being pursued by PacifiCorp, the company s credit quality could, in the near-term, be negatively
affected.
This near-term concern is balanced against the longer-term benefits to PacifiCorps bondholders of
ownership by MEHC, which is 80.5% owned by Berkshire Hathaway, and considers MEHC's successful track.
record in operating other regulated utility businesses as well as our belief that the potential new owners are
likely to take a longer-term view towards enhancing returns at PacifiCorp relative to the earnings
expectations of SP, the current owner.
The acquisition is subject to the approval of the SP shareholders
, as well as six state regulatory authorities
and federal regulatory authorities, including FERC, the SEC, and the NRC, and as mentioned, is expected to
take 12 to 15 months. During this timeframe, Moocly's will monitor the merger approval process at the
state
and federal level and assess the impact, if any, on PacifiCorp
s existing regulatory filings, as well as the final
form in which MEHC intends to finance this acquisition. To the extent that the merger related regulatory
proceedings do not meaningfully affect the timeliness or the outcome of state regulatory proceedings
currently underway, the PacifiCorp rating ouUook could stabilize. While the size of the company
s capital
expenditures limit the prospects for a rating upgrade at PacifiCorp in the near-
term, the rating could be
upgraded over the intermediate term if the company's capital expenditure program continues to be
financed
conservatively and if reasonably regulatory support is secured on a timely basis resulting in an
improvement
in credit metrics. This would include PacifiCorps funds from operations (FFO) to total adjusted debt being in
excess of 20% on a sustainable basis and its FFO to adjusted interest expense being in excess of 4.
0x on a
esustainable
basis.
Ratings affirmed include;
Senior secured debt; A3
Issuer Rating and senior unsecured debt; Baa1
httP://www.moodys.com/moody s/cust/research/MDCdocs/26/20034000004 2444
5 .asp? source=aJerts&seg...5/26/2C
~OQDY'8 AFFIRMS THE RATINGS OF PACIFICORP (Baal SR. UNSECURED); REvisES RATI...
: Preferred stock; Baa3
Page 2 of 2
_hort term rating for commercIal paper; Prime-
Shelf registration for the issuance of senior secured debt, senior unsecured debt, subordinate debt, or
preferred stock rated (P)A3, (P)Baa1 , (P)Baa2, or (P)Baa3, respectively.
Headquartered in Portland, Oregon, PacifiCorp is vertically integrated utility with operations in Oregon Utah
Washington, idaho, Wyoming, and California. PacifiCorp Is an indirect wholly-owned subsidiary of SP.'
New York
Daniel Gates
, Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
J. Sabatelle
VP - Senior Credit Officer
Corporate Finance Group
Moody's I nvestors Service
JOURNAliSTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
~ Copyright 2005, Moody s Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc.
(together
, "
MOODY'). All rights reserved.
AlL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION M,6.Y BE
PIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED
DISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY sueH PURPOSE, IN WHOLE OR IN PART,
IN ANY
ORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All
information contained herein is obtained by MOODY'S from sources believed by It to be accurate and reliable. Because of the
possibility of human or mechanical error as well as other factors, however, such information is provided nas is' without warranty
of any kind and MOODY'S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness,
completeness, merchantability or fitness for any particular purpose of any such Information.
Under. no circumstances shall
MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or
relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or
any of its directors, officers, employees or agents in connection with the procurement. collection, compilation, analysis,
interpretation, communication. publication or delivery of any such information, or (b) any direct, indirect, special, consequential
compensatory or incidental damages whahoever (including without limitation, lost profits), even if MOODY'S is advised in
advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings
and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be
construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or
hold any
securities- NO WARRANTY. EXPRESS OR IMPLlED, AS TO THE ACCURACY, TIMELlNESS, COMPLETENESS,
MERCHANTABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR
INFORMATION IS GIVEN OR MADE BY
MOODY'S IN ANY FORM OR ".,ANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any
investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly
make its own study and evaluation of each security and of each issuer and guarantor of
, and each provider of credit support for,
each security that it may consider purchasing, holding or selling.
MOODY'S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and
commercial paper) and preferred stock rated by MOODY'S have, prior to assignment of any rating, agreed to pay to MOODY'S for
appraisal and rating services rendered by it fees ranging from $1,500 to $2,400,000. Moody s Corporation (MeO) and its wholly-
owned credit rating agency subsidiary, Moody s Investors Service (MIS), also maintain policies and procedures to address the
independence of MIS's ratings and rating processes. Information regarding certain affiliations that may exist between directors
of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEe an
ownership interest in MCO of more than 5%, is posted annually on Moody s website at www,moodys.com under the heading
Shareholder Relations - Corporate Governance. Director and Shareholder Affiliation Policy.
http:/ /www,moodys. com/moodys/custlresearchIMDCdocsI26/20034000004 24445 .asp?source=alerts& seg.. 5/261201
Pac~fiCorp
...
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Credit Opinion: PacifiCorp
PacifiCorp
Portland, Oregon, United States
Ratings
Category
Outlook
Issuer Rating
First Mortgage Bonds
Senior Secured
Senior Unsecured MTN
Subordinate Shelf
Preferred Stock
Commercial Paper
Parent: Scottish Power pic
Outlook
Issuer Rating
Sr Unsec Bank Credit Facility
Arnior Unsecured
Wtah Power & Ught Co
Outlook
Preferred Stock
PacifiCorp Group Holdings Company
Outlook
Bkd Commercial Paper
Contacts
Analyst
AJ, SabatellelNew York
Kevin G. Rose/New York
Daniel Gates/New York
Key Indicators
PacifiCorp
Page 1 of3
Global Credit Research
Credit Opinion
27 MAY 2005
_------
Moody s Rating
Developing
8aa1
Baa1
(P)Baa2
Baa3
Stable
Baa1
Baa1
Baa1
Developing
8aa3
Stable
Phone
212.553.1653
Q32005LTM 2004 2003 2002
Funds from operations Adjusted Debt (1)16.17.SOk 14.
Retained Cash Flow Adjusted Debt (1J 11.13.14.-0.
Common Dividends Net Income Available for Common 81%66%95%
Adjusted Funds from Operations + Adjusted Interest
Adjusted Interest (2)
Adjusted Debt Adjusted Capitalization (1)(3)56.SOk 55.40k 56.60.
Net Income Available for Common COmmon Equity 10.
- Debt is adjusted for operating leases, guaranteed preferred beneficial interests in company s junior sub, and
bentures & preferred stock subject to mandatory redemption, 12) Adjusted Interest reflects adjustments for
operating leases and preferred stock dividends. (3) Adjusted Capitalization reflects the adjusted debt.
Note: For definitions of Moody'S most common ratio terms please see the accompanying User's (3ufgJ?.
http://www. moodys. comlmoodyslcustfresearchIMDCdocs/27/2002900000428342.asp? so urce=alerts&seg... 5/27/2005
Pacifi Corp Page 2 of 3
....' -, .
Opinion
Credit Strengths
.aCificorp S credit strengths are:
Low-cost generating assets and extensive transmission network through the western US
Recent key regulatory decisions have been constructive
Mile credit metries lag relative to similarly rated peers, recent rate increases are expected to improve credit
metrics.
Financing plan contemplates substantial equity support
Credit Challenges
PacifiCorps credit challenges are:
Regulatory uncertainty still remain due to numerous rate applications pending
Future capital expenditures Will increase materially
Six state utitity network creates regulatory challenges
Financial performance can be affected by hydro levels in the Pacific Northwest
Rating Rationale
8e Baa 1 senior unsecured rating of PacifiCorp reflects the relative predictably of cash flows expected from a well-
positioned, vertically integrated utility, and an affiliation with parent, Scottish Power, pic, (SP) who has
implemented operational effidencies, and has fortified relations with the state regulators. The rating also considers
the company's reasonably succesful efforts to raise rates which impmve regulated returns and sustainable cash
flow and can support an increasing capital budget over the next several years. While regulatory challenges remain
for PacifiCorp, the rating incorporates an expectation that the company will continue to maintain constructive
regulatory relationships during this Important period.
The rating also considers the announcement by MidAmerican Energy Holding Company (MEHC) to acquire
PacifiCorp from SP for $9.4 billion, including $5.1 billion In cash and the assumption of around $4.3 billion of
PacifiCorp net debt. The rating considers the expected continuation of equity support from SP prior to the
completion of the acquisition and factors in the belief that MEHC will manage PacifiCorps business, including its
future capital structure, in a way that is supportive to credit quality.
Rating Outlook
PacifiCorps rating outlook is developing. While Moody s views the acquisition of PacifiCorp by MEHC to have long-
term positive benefits, particularly given the size of the capital investment program, the developing rating outlook
incorporates the near-term potential for new regulatory challenges for PacifiCorp as the mergeHelated approval
process in each of the six states could affect the timing and the outcome of a number of important rate cases that
are underway throughout the companys six state jurisdiction. Most of the current rate cases have the potential for
PacifiCorp to obtain some form of rate increase, which collectively will enhance the company s returns and cash
flow as the utility increases its capital investment. To the extent that the merger approval process, which is
expected to take 12 to 15 months, substantially affects the timeliness or the amount of rate recovery currently
being pursued by PacifiCorp, the companys crecit quality could, in the near-term, be negatively affected.
This near-term concern is balanced against the longer-term benefits to PacifiCorp s bondholders of ownership by
, which is 80.5% owned by Berkshire Hathaway, and considers MEHC's successful track record in operating
er regulated utility businesses as well as our belief that the potential new owners are likely to take a long-term
.fiN; towards enhancing returns at PacmCorp,
Moody's will monitor the merger approval process at the state and federal level and assess the impact, if any, on
PacifiCorps existing regulatory filings, as well as the final form in which MEHC intends to finance this acquisition.
http://www . moody s. com/moody sf cust/research/MDCdocs/27 /20029000004 28342. asp ?source=a1erts&seg.. ,5/27/2005
Pacifi Corp
1b'the eXte'flt that the merger related regulatory proceedings do not meaningfully affect the timeliness or the
outcome of state regulatory proceedings currently underway. the PacifiCorp rating outlook could stabilize,
Page30f3
.hat Could Change the Rating - DQWN
Given the size of PacifiCorp s capital program and the ratings reliance on ongoing regulatory support, the rating
could be downgraded if timely regulatory support is delayed or materially affected due to the merger related
regulatory approvals.
',A/hat Could Change the Rating - UP
While the size of the capital expenditures limit the prospects for a rating upgrade at PacifiCorp in the near-term, the
rating could be upgraded over the intermediate term if the company s capital expenditure program continues to be
financed conservatively and if reasonably regulatory support is secured on a timely basis resul1ing in an
Improvement in credit metrics. This would include PacifiCorps funds from operations (FFO) to total adjusted debt
being in excess of 20% on a sustainable basis and its FFO to adjusted interest expense being in excess of 4. OX on
a sustainable basis.
(9) Copyright 2005, Moody's Investors Service, Inc, and/or its licensors including Moody's Assurance Company, Inc.
(together
, "
MooDY'). All rights reserved.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE
COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED
REDISTRIBUTED OR RESOLD , OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY
FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All
information contained herein is obtained by MOODY'S from Sources believed by it to be accurate and reliable. Because of the
possibility of human or mechanical error as well as other factors, however, such information is provided "as is" without warranty
of any kind and MOODY'S, in particular, makes no repre5entation or warranty, express or Implied, a5 to the accuracy, timeliness,
completene5s, merchantability or fitness for any particular purpose of any such Information. Under no circumstances shall
MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or
relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or
any of its directors, officers, employees or agent5 in connection with the procurement, collection, compilation, analysi5,
interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential
compensatory or incidental damage5 whatsoever (including without limitation, lost profits), even if MOODY'S is advi5ed in
vance of the possibility of such damages, resulting from : use of or inab!lity to u~e, any such infon":1ation. The credit ratings
d financial reporting analysIs observatlon5, If any, constituting part of the information contained herem are, and must be
0115trued solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any
securities. NO WARRANTY, EXPRESS OR IMPUED, AS TO THE ACCURACY, TIMEUNESS, COMPLETENESS , MERCHANTABILITY OR
FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY
MOODY'S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any
investment decision made by or on behalf of any user of the information contained herein, and each such U5er must accordingly
make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for,
each security that it may consider purchasing, holding or selling.
MOODY'S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and
commercial paper) and preferred stock rated by MOODY'S have, prior to assignment of any rating, agreed to pay to MOODY'S for
appraisal and rating services rendered by it fees ranging from $1 500 to $2 400 000, Moody s Corporation (lVlCO) and its wholly-
owned credit rating agency sub5idiary, Moody s Investors Service (MIS), also maintain policies and procedures to address the
independence of MIS's ratings and rating processes, Information regarding certain affiliations that may exist between directors
of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an
ownership interest in MCO of more than 5%, i5 posted annually on Moody s website at www.moodys.com under the heading
Shareholder Relations - Corporate Governance - Director and Shareholder Affiliation Policy,
http://www . moodys. com/moodys/ custiresearch/MDCdocs/27/20029000004 28342 .asp? source=al erts&seg.. .5/27/2005
Analysis
UNITED STATES
Americas
June 2005
it~\'I%~;t 4~ !~~I,~~~IHJilli!IN~~~1ff!~1 ~jiilitl! I.
New York
J. Sabatelle
Daniel Gates
212.553.1653
PacifiCorp
PacifiCorp is a regulated utility serving retail customers in portions of the states of Utah, Oregon, Wyoming, Wash-
ingtOn, Idaho, and California. As a vertically integrated utility, PacifiCorp owns and has contiacts for fuel sources
including coal and natural gas and uses these fuel sources, as well as other fuel sources, including wind, geothennal,
and hydro, to generate electricity at its power plants. PacifiCorp conducts its retail electric utility business under the
names Pacific Power and Utah Power, and sells excess electricity generation in the wholesale power market. Sales to
retail customers in Utah and Oregon represent about 70% of PacifiCorp s total retail revenues.
PacifiCorp s fiscal year ends on March 31st. During fiscal year 2005, the company's total revenues reached $3.048
Billion and its net income was $251.7 million. PacifiCorp is an indirect wholly-owned subsidiary of Scottish Power pIc
(SP: Baal senior unsecured).
On March 23, 2005, SP executed a Stock Purchase Agreement with MidAmerican Energy Holdings Company
(MEHC) providing for the sale of the common stock of PacifiCorp for approximately $9.4 Billion, consisting of $5.
Billion in cash plus the assumption of approximately $4.3 Billion in net debt and preferred stock. The sale requires SP
shareholder approval and will require numerous state and federal regulatory approvals. The company anticipates the
sale will be completed during calendar year 2006.
~~..
Moody s Investors Service
~~~
(;Iobsl Credit Research
Low-cost generating assets and extensive transmission network through the western
.-~~.. "'....-,.....
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PacifiCorp owns or has access to low cost generating assets, the bulk of which is coal-fired assets. Mines owned by
PacifiCorp provide about 30% of PacifiCorp s coal needs, with the remainder being sourced by long-tenD and short
term contracts. PacifiCorp s owned generation satisfied 79% of the utility s 2005 energy needs, with the remaining
21 % being satisfied by short-term and long-term purchases.
In addition to the company s low-cost generation resources, the company owns or has access to an extensive trans-
mission system covering 15,530 miles throughout the Pacific Northwest. Access to this multi-state system favorably
positions PacifiCorp in the wholesale power market to secure or to sell excess capacity as needed.
PacifiCorp Owned Generation PacifiCorp s Energy Requirements 2005
15%21%
~I!il~~~~~aI~1T~
9"A.
70%76%
SOIJn;e: PBclfiCorp 2005 IO.SourCB: PaclfiCorp 2005 1Q-K
Recent key regulatory decisions have been constructiveUL.
--"""'"'"
For the past several years, PacifiCorp has been actively seeking regulatory support across the company s six-state juris-
diction in an effort to enhance returns at the utility. To date, PacifiCorp s efforts have been reasonably successful.
In Utah, which represents about 40% of total retail revenues, the Utah Public Service Commission (upSC)
approved, in February 2005, a stipulated settlement of the company s general rate case awarding an increase of $51 mil-
lion annually, based upon a retUrn on equity of 10.5%. Additionally, in October 2004, the UPSC approved the use of a
forward-looking test year, which was implemented for the first time in the company s general rate case, and helps to sup-
port the company s credit fundamentals while it finances its large capital invesnnent program. Also, in Utah, the state
passed Senate Bill 26 in February 2005. Among other things, this bill provides PacifiCorp with the opportunity to obtain
advance approval from the UPSC of resource decisions and an assurance of recovery of costs associated 'with the resource.
In Oregon, which represents slightly less than 30% of total retail revenues, the Oregon Public Utility Commis-
sion (OPUC) approved, in July 2002, recovery of the company s deferred accounting filing relating to excess net power
costs. The order authorized recovery of$131.6 million, plus carrying costs, at a rate of $45.6 million annually.
Financing plan contemplates substantial equity support
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PacifiCorp s capital expenditure program is expected to be more than $1 billion in each of the next tWo years. Pacifi-
Corp intends to finance this program with a combination of internally generated funds, the issuance of long-tenD debt,
and substantial equity support from indirect parent, SF. To that end and pursuant to the Stock Purchase Agreement,
SP is required to contribute $125 million per quarter during 2006 and $131.25 million per quarter during fiscal year
2007. If the sale of PacifiCorp is completed, MEHC will refund to SP the amount of required fiscal 2007 common
equity contributions as an increase to the purchase price. Moreover, pursuant to the Stock Purchase Agreement, SP
has agreed to cause PacifiCorp to not pay dividends in excess of$53.7 million per quarter during 2006 and in excess of
$60.575 milIion per quarter during 2007.
While credit metrics lag relative to similarly rated peers, rate increases have strengthened
credit metrics
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PacifiCorp s credit metrics, while improving since 2001 and 2002 , conrinue to remain weak when compared to other simi-
larly rated vertically integrated utilities. For exanlple, funds from operations (FFO) to total adjusted debt averaged slightly
less than 20% over the last tWo years, while PacifiCorp s FFO coverage of adjusted interest expense averaged near 4.Ox.
Given the size of the company s capital investment program along with the number of rate requests oursmnding, reaSOD2 ble
regulatory support over the neXt several years coupled with a fairly conservative capital strUcture will be the tWo biggest driv-
ers ofPacifiCorp s near-tenD credit quality.
Moody s Analysis
Six state utility network cr~ates regulatory challenges
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Among the largest challenges for PacifiCorp is managing the regulatory relationships of six different state commis-
sions. Since 2002, the company has been involved in designing and implementing a cost allocation methodology that
would achieve a more pennanent consensus on the allocation of costs across the six state service territory. In March
2005. final ratification of'the revised protocol for cost allocations was approved in four of the six states--Utah, Oregon,
Wyoming, and Idaho. In WashingtQn, the commission accepted the revised,cost allocation protocol for reporting pur-
poses and established a process for ongoing discussions that could lead to a pennanent allocation methodology during
fiscal 2006, In California, the re~ed protocol will be filed in the company s ne~ general rate case.
Regulatory uncertainty still remains due to numerous rate applications pending
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VVhile PacifiCorp has achieved a reasonable level of success in obtaining important rate relief throughout the com-
pany s six state service territory, challenges remain given the number of pending requests outstanding.
In Oregon, PacifiCorp filed a generalrate case in November 2004 with the OPUC related to increases in operat-
ing costs, including fuel, purchased power, and pension and' health care costs. PacifiCorp is seeking an increase of
$102.0 million annually. If approved by the OPUC, the increase would take effect in September 2005. Several parties
have reached a partial stipulation with PacifiCorp that would reduce .the proposed revenue requirement increase in the
case from approximately $102 million to approximately $71 million. The partial stipulation covers many items includ-
ing net power costs but certain items, including cost of capital, pensions and benefits are still being litigated. Hearings
are scheduled to occur in July 2005.
Also, in Oregon, PacifiCorp filed an application in February 2005 for deferral of higher power costs in calendar
2005 due to continuing poor hydroelectric conditions. On May 25,2005, this deferral application was suspended to
allow the parties to focus on the power cost adjustment mechanism filed by PacifiCorp in April 2005. If approved, the
proposed power cost adjustment mechanism will address. Oregon s share of PacifiCorp s total net power cost volatility
resulting from such factors as hydroelectric, natural gas and load variability. The proposed power cost adjustment
mechanism is designed to be a longer-tenD, ongoing mechanism that passes through to customers a portion of excess
net power costs or returns to customers a portion of over-collected net power costs, keeping rates more closely aligned
with PacifiCorp s actual costs.
In Wyoming, the Wyorriing Public Service Commission (wpSC) approved a joint stipulation increllsing rates by
$9.3 million annually, effective September 15 2004. As part of this stipulation, PacifiCorp agreed not to file a general rnte
application until at least September 30, 2005. Further, the parties agreed to hold discussions on the development of a
commodity cost recovery mechanism and alternative forms of regulation. Discussions on both topics are underway.
In Washington, PacifiCorp filed an application in March 2005 for the deferral of higher power costs in 2005 due
to poor hydroelectric conditions. PacifiCorp requested that the deferral continue through the conclusion of the gen-
eral rate proceeding. As part of that proceeding, PacifiCorp expects to address the rate treatment of the current low
hydroelectric trend and power cost volatility through a proposed power cost adjustment mechanism.
Also, in vVashington, PacifiCorp, on May 5, 2005, filed a general rate case request with the Washington Utilities
and Transportation Commission (WUTC) for approximately $39.2 million related to increases in operating costs,
including fuel, purchased power, pension and other employee benefit costs. The rate increase also addresses invest-
ment in new generation, the implementation of a power cost adjustment mechanism and ratification of the multi-state
process protOcol discussed above that has been adopted by four other states seIVed by PacifiCorp. PacifiCorp is seek-
ing an allowed rate of retUrn on equity of) 1.125%.
In Idaho, PacifiCorp, on January 14, 2005, filed a general rate case with the Idaho Public Utility Commission
(IPUC) related to continuing investment to seIVe Idaho load, increases in employee-related costs and general inflation
impacts. PacifiCorp is seeking an increase of $) 5.1 million annually. If approved by the IPUC, new rates would take
effect September 16, 2005.
Moody s Analysis
While the potential acquisition of PacifiCorp by MEHC has long-term benefits, near-term
regulatory challenges could surface as the merger-related approval process could affect the
timing aod the outcome of a number of existing rate cases
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Following the announcement that MEHC would purchase the stock ofPacifiCorp from SF, Moody s changed the rat-
ing outlook for PacifiCorp to developing from stable. The change in rating outlook incorporates the view that, while
the acquisition of PacifiCorp by MEHC may have long-term positive benefits, particularly given the size of the capital
investment program, new near-term regulatory challenges may surface as the merger-related approval process in each
of the six states could affect the timing and the outcome of a number of important rate cases that are underway. As dis-
cussed above, most of the CUITent rate cases have the potential for PacifiCorp to obtain some form of rate increase
which collectively will enhance the company s returns and cash flow as the utility increases its capital investment. To
the extent that the merger approval process substantially affects the timeliness or the amount of rate recovery currendy
being pursued by PacifiCorp, the company s credit quality could, in the near-term, be negatively affected.
This near-term concern is balanced against the longer-term benefits to PacifiCorp s bondholders of ownership by
MEHC, which is 80.5% owned by Berkshire Hathaway, and considers MEHC's successful track record in operating
other regulated utility businesses as well as Moody's belief that the potential new owners are likely to take a long-term
view towards enhancing returns at PacifiCorp.
Moody s intends to monitor the merger approval process at the state and federal level and assess the impact, if any,
on PacifiCorp s existing regulatory filings, as well as the final form in which MEHC intends to finance this acquisition. .
To the extent that the merger related regulatory proceedings do not meaningfully affect the timeliness or the outcome
of state regulatory proceedings currently underway, the PacifiCorp rating outlook could stabilize.
While the size of the company s capital expenditures limit the prospects for a rating upgrade at PacifiCorp in the
near-term, the rating could be upgraded over the intermediate term if the company s capital expenditure program con-
tinues to be financed conservatively and if reasonably regulatory support is secured on a timely basis resulting in an
improvement in credit metrics. This would include PacifiCorp s funds from operations (FFO) to total adjusted debt
being in excess of 20% on a sustainable bas.is and its FFO to adjusted interest expense being comfortably in excess of
0x on a sustainable bas.is.
Future capital expenditures will increase materially
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Depicted below are the actual capital expenditures for the year ended March 31 , 2005, as well as PacifiCorp s esti-
mated capital expenditures for the years ending March 31, 2006 and 2007.
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Actual and estimated future capital expenditures include upgrades to distribution and transmission lines, upgrades
of generating plant equipment, connections for new customers, facilities to accommodate load growth, coal mine
investments, air-quality and environmental expenditures, hydroelectric relicensing costs and information technology
systems. In addition, these estimates include the remaining costs related to the Currant Creek Power Plant (Currant
Creek) and the costs to have the Lake Side Power Plant (Lake Side) developed and constructed to meet custOmer
resource needs in summer 2007.
Moody s Analysis
Financial performance can 'JJe affected by hydro levels in the Pacific Northwest
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Like other utilities in the Pacific Northwest that rely upon .hydroelectric energy, PacifiCorp s year-to-year financial
results can be impacted. The current lower than nonnal hydro levels have caused PacifiCorp to become more depen-
dent on higher costs alternatives, including wholesale purchases or generation from its own fossil fuel resources. Paci-
fiCorp is addressing this issue on tWo fronts. For one, the company is building two natUral gas-fired power plants
Currant Creek and Lake Side, whic~ when completed, will better balance loads and resources, particularly during peak
periods of the year. Additionally, the company is seeking a pennanent commodity adjustment clause in a nrunber of its
state jurisdictions, which if obtaincrd, would strengthen the predictability of ye~-over-year cash flow currently caused
in part, by changes in hydroelectric conditions.
MoOdy s Analysis
Related Research
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Industry Outlook:
S. Electric Utiliries, May 2005 (92520)
Ratin~ Methodology:
Rating Methodology: Global Regulated Electric Utilities. March 2005 (91730)
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PacifiCorp. May 2005
To access any of these nports, click on the tmtry above. Note that these refe1'ences are CU1-rent as of the date of publication of this report
and that more recent reports may be available. All research 71UlJ not be available to aU clients.
Moody s Analysis
Rating History Peer First ~ortgage Bonds
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PacifiCorp.Peer Group Average
Moody s Analysis
To O1'de1' rep1'i1ZtJ of tbis 1'epO1't (100 (opic.f1nini17l,um), please (lIJ/1.212.53.1658.
Report Number: 93067
Author
AJ, Sabate/le
Associate Analy5t
Effie Han
Production Associate
Wing Chan
C Copyright 2005, Moodys Investor, Servke, Inc, and/or lIS licensor, including Moody', Assurance Company. I"", \together
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